Portugal scraps rent controls, alarms low-earners

BARRY HATTON, Associated Press

Published 9:43 AM ET Sun, 11 Nov 2012
The Associated Press

LISBON, Portugal -- The peaceful retirement of Teresa Dourado is about to be shattered.

The 77-year-old widow raised two children with her husband in their fourth-floor apartment behind Lisbon's Campo Pequeno bull-ring. It has been the family home since 1966. Living alone there now among black-and-white photographs of her children and with her husband's framed paintings, she pays a controlled rent of (EURO)100 ($128) a month. That just about allows her to get by on her monthly pension of (EURO)414.

But Portugal is scrapping its long-standing rent controls in one of the government's most radical economic and social reforms since the ailing country needed a (EURO)78 billion bailout last year, when it was engulfed by Europe's financial crisis. Critics say the anticipated rent hikes from next month could price thousands of families out of their homes. At the very least, the change _ aimed at boosting and modernizing the economy _ will add to the financial burden on those struggling to cope with pay cuts and tax hikes designed to ease the country's crippling debt load.

"I'm already having trouble paying (EURO)100," says Dourado. "I don't want charity. I've worked all my life. I shouldn't have to beg for anything."

The new rent law casts aside protections that date from the early 1900s, and are seen as one of the reasons for Portugal's economic decay. It's all part of a plan to jettison a way of life that has been handcuffed to the past, holding back the dynamism needed to put the nation on the path of growth. The measure, long delayed due to its political toxicity, also illustrates how Europe's financial crisis is snatching away old certainties and expectations _ in this case, over something as basic as having a roof over your head.

The change in rent laws was one of the steps demanded in return for the financial lifeline provided by foreign lenders. They identified rent controls as one of the handicaps keeping Portugal mired in stagnation. Similarly, their insistence on labor reforms is taking away long-standing entitlements, such as jobs for life, which choked development, consigning Portugal to low growth and mounting debt. These are precisely the kinds of measures that have triggered massive protests across Europe in recent years, raising questions about the viability of the European project.

The goal of the new law is to free up rental accommodation, making it easier for workers to seek jobs around the country. It also aims to help people avoid racking up mortgage debt; put prime real estate to more productive uses; encourage owners to renovate buildings that are crumbling because they don't earn enough rent money; and provide work for hard-up construction companies.

Rent controls have long enabled those on a low income to live cheaply in one of western Europe's poorest countries. The minimum salary, earned by more than 600,000 workers, is (EURO)485 ($624) a month before tax. The average salary is around (EURO)800 ($1,030). That compares with the U.S. minimum wage of $1,317 a month and an average monthly wage of $3,500.

Portugal's rent controls aren't unique in Europe. Germany and the Netherlands, for example, also place some modest limits on rent increases. But their laws are nowhere near as old, comprehensive and rigid as in Portugal, where lifelong contracts with minimal, inflation-linked rent hikes have been handed down through generations.

The government says the new law contains safeguards for low earners. Increases in the rents paid by people like Dourado will be limited to between 10-25 percent over the next five years before full liberalization.

Even so, the scale of the threat to many residents is huge. Last year's national census showed about 250,000 families are in houses with old contracts, which will now come up for price review. That's about 1 million people _ or almost 10 percent of the population.

Romao Lavadinho, president of the Lisbon Tenants' Association, has held dozens of public meetings to explain the new law to worried tenants. In one, hundreds of people packed into Lisbon's Sao Jorge cinema on the capital's main avenue.

"People are in a terrible state of anxiety," said Lavadinho, whose association has around 20,000 paying members. It's not just low earners who are nervous, he says _ lawyers, teachers and architects are among those turning up at meetings.

The rent reform hits as Portuguese struggle with other woes.

The cost of living has climbed, even as incomes have fallen sharply due to the country's austerity drive. The sales tax on gas and electricity, for instance, has jumped to 23 percent from 6 percent, leaving people short for other expenses.

A wholesale reassessment of property values by the tax authorities will establish by how much landlords can begin to charge their tenants. Lavadinho notes that step will also hurt the middle class. In apartment blocks along Lisbon's main avenues, he reckons, rents could jump from (EURO)200-300 a month to (EURO)1,000.

The main thrust of the new law is to unfreeze pre-1990 rental contracts. Those contracts still come under a 1910 law that, in the turmoil following the end of the Portuguese monarchy and the establishment of a Republic, sought to contain inflation. It stipulated that the initial rent could be increased only by a government-decreed annual rate, usually just a few percent.

Mindful that there are more tenants than landlords, and eyeing their electoral prospects, governments have long shied away from changing the law to any meaningful extent. The result: 150,000 households currently pay less than (EURO)50 in monthly rent, some of them in prime real estate areas, according to census data.

That is also a key to the mystery of downtown Lisbon's shabby charm. It's a western European capital trapped in 100-year-old laws that deny landlords the income to refurbish decaying buildings. Portugal's National Statistics Institute, in a report last year, bluntly stated the consequences: "Lisbon can be used as a textbook case on how to destroy a city without bombing it," it said.

Luis Menezes Leitao, president of the Lisbon Property Owners' Association, a national body with some 10,000 members, notes that foreigners find the old law hard to believe. Some people in central Lisbon, he says, pay as little as (EURO)5 a month in rent.

"This had to be done sooner or later," Menezes Leitao said of the legal changes. "Economically speaking, it's unsustainable."

Examples of what he calls "a gigantic distortion of the market" are not hard to find.

Susana Paiva's family owns a building on Lisbon's central Rossio square which is partly occupied by a hotel. The building's estimated real estate value is (EURO)4.5 million, which at market prices should bring in about (EURO)30,000 a month in rent. But the 34-room hotel, whose room prices start at around (EURO)150 and rise to almost double that, pays her just (EURO)633 a month. The rental contract dates from 1919.

Paiva has one word to describe that: "ridiculous."

She says the old-fashioned mom-and-pop stores which still abound in the area around her building are surviving only because they pay a handful of euros in rent per month. In effect, landlords are subsidizing businesses, she says.

"Low rents for businesses are pernicious in the 21st century," Paiva said. "It means that the people running them don't need to modernize, find new markets, become more competitive."

By contrast, the Lisbon Commercial Association, which represents the capital's shopkeepers, predicts the new law will bring "dramatic consequences" as stores, suddenly at the mercy of market forces, shut down and add to the country's record unemployment rate of 15.9 percent.

Elsewhere in the center of town, a seven-story apartment building owned by Jose Gago da Graca's family offers another bizarre example.

The tenant in apartment 2E pays (EURO)196 a month rent for a three-bedroom apartment. The occupant of 2D, across the hall, pays (EURO)1,600 a month for an identical second-floor flat.

That's because the elderly widow in 2E has been there since 1962 and her faded blue rental contract guarantees her tenancy in perpetuity, with controls on the initial rent which was the equivalent of (EURO)14. Her neighbor, who recently moved in when the previous occupant moved out, pays the market price.